The race to grapple with financial
position in emerging economies expedited a long ago, compounded with
international financial crisis, further this instigated devouring financial
institutions to tighten their grips in and around developing economies.
Following fundamental of marketing, they are innovating financial products in
accordance with the prominent needs existing in an economy or in conformity with
desires of potential target market. In case of Pakistan, markets that are
catching attention of financial players are surfacing untapped or poorly served
areas in small, medium and cottage industries, retail trade, restaurant
business, etc. Similarly, institutions concentrating operations domestically are
receiving spillovers of inundation of investments in financial sector especially
banking, compelling them to map out their marks in the midst of evolving
competition. Hence, they are expanding branch network to rural and suburban
areas where great business opportunities exist.

Ministry of Finance has under the
patronage of international supporter initiated a study to understand
contemporary needs of banking transactions in rural areas of Pakistan. The
result of this study is expected at this fiscal year end. The final research
report will disclose refined information for FIs to design financial products
accordingly. Development and growth of small and medium business has been a
daunting task for the government for long due to informal structure and
impediments presented at demand and supply side. Concerning later, neither
public sector commercial banks, private, foreign and nor specialized banks have
considerably focused on development of targeted or tailor made products for
small and medium sector. Same is the destiny for micro finance. The market and
interest risks further distract the focus.

While there are ample opportunities
available in both micro financing and lending to SMEs, volatility in interest
rate, foreign exchange rate, and equity prices pose serious threats to earnings
of banks. Despite market and interest risks and increasing cost of non
performing loans, over years, profitability of banks has substantially been
increasing. Total pre-tax profit of the banks jacked up from Rs. 7 billion in
2000 to Rs. 123.6 billion in 2006. Given the low saving to GDP ratio, growth in
profitability indicated towards a positive development that people were
depositing their money in banks. However, critics see profit growth with
different angle, saying banks are making profits by keeping rate of return on
deposits low. In fact, banks lending rate is more than that of deposit rate and
banking spread in Pakistan is said to be highest in the region. According to a
renowned banker, this is against State Bank' provision. It is a sheer
exploitation that banks are having real negative rate of returns: rate of return
which is below inflation rate. Arguably, bank spread has gained a widening gap
alike in developed and emerging economies.

Lending to small and medium
organizations is not significant in Pakistan in spite of the sector's importance
in building mainstream economy. No latest data are available about the sector,
but last released statistics by Economic Census of Pakistan-2005 showed that
there were 3.2 million business economic enterprises or establishments operating
nationwide and of which SMEs constituted over 99 percent. Its share in
industrial employment was 78 percent and in value addition around 35 percent.
Retail trade, wholesale, restaurants and hotel business formed major portion of
53 percent of overall activity in SME sector whereas industry and service had 20
and 22 percent respectively. Not only that the sector promotes entrepreneurship
and self employment in the country, it also helps in accelerating sustainable
economic progress.

The reason for considering these
sectors is their involvement of small manufacturing and with cottage or home
grown industry. Except knitwear that despite too separately concentrates in
small sized factories, is counted in large scale manufacturing. Otherwise, in
other sectors, volume of production does not require long chained industrial
processes and can be increased with small working capital.

Especially agriculture sector can
guarantee profitable banking operations provided strategic financial solutions
for the sector. Since agriculture employed over 43 percent of approximately 50
million workforce of Pakistan after trade (14.43%), services (14.41%) and
manufacturing (13.54%), it could better absorb liquidity of banks with healthy
returns. Financial solutions emerged as a result of detailed working could
minimize the risk associated with NPLs. According to World Bank, the repayment
rate for micro credit loans it extended to more than 275,000 borrowers in
Pakistan, of which 45% were women, was 100%.

World Bank has been the main financer
of Pakistan's Poverty Alleviation Funds. Poverty alleviation through extending
micro credits is not only beneficial for the socio-economic development but also
for financer. Private sector participation in exploring rural as well urban
bankable market would magnify reach of financial lending services nationwide.
Demand volume of micro credit in Pakistan is very high, giving financial
institutions an opportunity to benefit from economies of scale.

Extension of loans to electric and
communication and other emerging vocations against low interest rate can halve
underemployment in the country. Only incentives can lead customers to banks that
in turn can get better return on assets. As there are lots of people who despite
requirement of using banking services avoid banking transactions, banks can
expand services outreach by attracting them. It would also support increase
national saving. Unlike Pakistan where government assumes main responsibility of
disbursing micro credit, India has private banks like Citi Bank largest shares
in assets of micro credit.